Case Law Summaries

Friedman Siegelbaum, LLP v. Pribish

PARTNERSHIPS; FIDUCIARY DUTY — A contract partner in a law firm has the same fiduciary duty to the law firm as does an equity partner.

The equity partners of a law firm entered into a contract partnership agreement with an attorney. After the agreement was signed, the equity partners began exploring the possibility of a merger with another law firm without the knowledge of the contract partner. Although the equity partners tried to keep the discussions confidential, the merger talks became public knowledge. Many of the attorneys at the firm were extended offers to join the new firm, but not the contract partner. A few month later, the original firm closed operations. As of that date, the firm had paid the contract attorney approximately $68,000 more in draw than he had earned. The contract attorney then joined another law firm as an equity partner. He had a continuous relationship with two clients both at his old firm and at his new firm. After the dissolution of the old firm, these clients paid the contract partner various amounts in full settlement of the legal fees that they owed the contract partner. None of these fees were repaid to the old firm to satisfy the draw monies that the contract partner owed. The equity partners sued the contract partner.

The Law Division held the contract partner: (i) breached his covenant of good faith and fair dealing; (ii) violated his fiduciary duty; (iii) tortiously interfered with a contractual relationship; and (iv) illegally converted the receivables. The lower court rejected the contract attorney’s argument that his old firm’s wrongful termination of the relationship negated his covenant of good faith and fair dealing. The lower court also rejected the argument that the contract partner did not owe the old firm a fiduciary duty because he was not an equity partner. The lower court found that every partner has a fiduciary duty, even contract partners. The court believed the partner should be held to a very strict obligation when, as here, a contract partner controls and exclusively manages a partnership’s interest. Moreover, it held that although the dissolution caused strained relationships among the partners, it did not excuse the contract partner’s obligations under his contract agreement. Since the contract lawyer granted a release to the two clients on behalf of the old firm without the old firm’s knowledge, on the same day he received payment from the clients, the lower court ruled that the contract lawyer tortiously interfered with the old firm’s contractual relationship with its clients. As to the issue of conversion, the lower court held that when the contract partner cashed checks from the client or signed the checks over to his new firm, he converted those accounts receivable into a form of remuneration for himself. The contract partner appealed these rulings.

The Appellate Division affirmed. First, the Court ruled that the contract attorney was more than a simple employee and that he maintained full control over his clients’ accounts. Thus, the Court found the contract attorney had a fiduciary duty to his old firm to seek collection on these accounts. The Court noted that the attorney violated that duty when he assured the equity partners of his willingness to assist them in collection of receivables and then accepted money from his clients on his own behalf without disclosing such facts to the equity partners of the original firm. Second, the Court believed that the contract attorney violated his implied duty of good faith and fair dealing when he acted solely for his own personal gain. Third, the Court held the defense of wrongful termination was not an excuse for the contract attorney’s violation of his implied covenant of good faith and fair dealing in the agreement. Fourth, the Court ruled that the contract attorney had not been found liable by the lower court for his failure to repay the draw. What it found was that the old firm’s suit was based on the contract attorney’s conduct that prevented his old firm from collecting fees duly owed to it. The Court ruled that all of the required elements were presented to prove tortious interference with contract. In this regard, the Court noted that the lower court had found that the contract attorney led the clients into believing that they had satisfied all of its legal bills and then concealed the checks’ existence from the equity partners. Finally, the Court agreed with the lower court that the contract attorney converted the accounts receivable when he cashed the checks or turned the checks over to his new firm.